Summary of Article one. “Back to Basics Inflation”

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Summary of Article one.

“Back to Basics Inflation”

This article on inflation describes the effect of inflation on the economy as a whole and on the effects on Money. The article gives a definition of inflation as the persistent rise in the general level of prices.

The first point explained is about the inflation rate in 1970, which showed prices had risen to 26.9%. This would prove a great problem to the public if there were not a raise in real income as most necessities would not be affordable. Also due to this rise in prices Savers suffered due to low interest rates and those who borrowed money had to pay less for their debts.

The article then talks about the effects of inflation on the functions of money; it explains that the function of money was to replace the barter system where commodities were exchanged in terms of another product or service. It explains that too much money causes very rapid inflation and that as inflation raises the purchasing power of the currency decreases. In turn it makes it harder for firms to decide whether or not real profits have been reached as if there is a rise in revenue the firm does not know whether it is due to an increase in sales or because of the rise in prices for the resources.

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The article then talks about the Causes and consequences of inflation; inflation is caused by the rise in aggregate demand through a rise in government spending or through Consumer spending. Prices are raised when there is excess demand in a market; this price rise is called demand-pull inflation. The demand-pull inflation process is explained through figure 2. Where there is excess demand firms increase their labour force to increase their supply. The extra wages means price increases which leads to wage spiral as increases in wages means that price increases again. Then powerful trade unions win large wage rises and ...

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